Pros and Cons of Debt SEttlement

Pro's

Taking Care of Your Debt Privately

It retains confidentiality. Bankruptcy is a matter of public record and you are required to make an appearance in federal court at least once. Negotiating a settlement is a completely private matter, between you and the creditor. 

Satisfy the Debt For a Lesser Amount

Settling one or multiple debts for a lesser amount than the original balance can save you a substantial amount of money. Some collectors may even agree to delete any negative information on your credit report. Furthermore, debts resolved through settlement and other means are no longer subject to collection calls and legal action.

Con's

Saving Money to Settle a Debt Can Prove Difficult

Consumers who need to settle a debt down the road usually find it difficult to set aside any extra savings after all their necessary expenses are accounted for. If they had more money, most consumers would be better off repaying their debts through some other payment arrangement.

How Debt Settlement Affects My Credit Score?

Once the creditor agrees to the settlement amount, you make payment and the account is paid off. The creditor instructs the credit bureaus to report the account as settled-in-full with a $0 balance, opposed to paid-in-full. The account has been paid off, however the credit bureaus still factor that the account was past due at one time, therefore they still report it as a negative account. The older the account becomes, the less it will impact your score.

Forgetting to Ask For Satisfaction

Never rely on a creditor or collection agency to live up to any oral agreement. If you fail to get a written statement from the collector that you no longer owe anything on the debt, they may sell the remainder to another collection agency.

Paying Tax on Your Forgiven Debt

Debt settlement is a taxable event. Collection agencies are required to submit Form 1099 to the IRS to report any forgiven debt of $600 or greater. Sometimes that tax event can put people in worse shape than they were in to begin with. Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That's a debt that the IRS won't forgive. (Read a story for advice on what to do when you can't pay your taxes.) One exception: If you're insolvent — namely your assets are less than your liabilities — you can petition the IRS to waive that tax liability by filing form 982.

Consider a scenario in which you originally owed $7000 and over time, with interest and penalties, it increased to $10,000. Five or six months go by, the harassing collection calls have subsided, and the creditor wants to settle. They agree to settle for $4,000 on the $10,000 debt. The creditor counts the remaining $6000 as a loss and writes it off as their own tax deduction. They then send you a 1099, making you responsible to claim that $6000 as income. This means you will have to pay taxes on that $6000!

A Creditor or Collection Agency Can Still Sue You

Until a debt is completely settled and you have the receipt in hand, a creditor can and may sue you. Sometimes a company may even sign a written agreement offer and start the litigation process a week later.

Learn about "The Do's and Don'ts of Debt Settlement."

 

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

*For all consumers
*For members only
*Coming Soon

 

Mortgages

  • Mortgage eligibility
  • Loan to Value
  • Mortgage Insurance
  • Rent/Leases

Insurance

  • Insurance premiums
  • Car Insurance
  • Home Owners Insurance
  • Why it matters

Employment

Interest Rates

  • Mortgages
  • Automobile
  • Credit card
  • Store Financing

 

*For all consumers
*For members only
*Coming Soon

 

How to Read a Credit Report

Obtaining Your Credit Report

Mechanics of Credit Scoring

Members Only

  • Why Credit Scores?
  • Who is FICO?
  • Fair Issac Corporation Speaks Out
  • Credit Card Debt Affects Score
  • How Do Inquiries Affect Score?
  • Different Types of Scores
  • What is a Good Credit Score?

Obtaining Your Credit Score

  • Online Vantage Scores Are Insignificant
  • Types of Scores That Matter

 

*For all consumers
*For members only

 

Credit Management Principles

  • How Many Trade Lines Should You Have
  • Recentness of Account Activity
  • Length of Payment History
  • Managing Revolving Debt - Credit Cards & Lines of Credit
  • Late Payments – What You Need to Know
  • How Inquiries Affect Your Score
  • Paying Collections or Defaulted Accounts
  • Your Debt-to-Income Ratio (DTI) Impacts Loan Approval

Credit Restoration

Establishing Positive Credit

 

*For all consumers
*For members only
*Coming Soon

 

Debt Validation

Members Only

Debt Settlement

Members Only

Credit Counseling

Members Only

About Chapter 7 Bankruptcy

  • What it is
  • How it works - rules
  • How it works - process
  • Should you file for bankruptcy?
  • Impacts of bankruptcy on your credit report and score
  • Reaffirmation - assets you want to keep
  • Common mishaps and selecting a good attorney

About Chapter 13 Bankruptcy

  • What it is
  • How it works - rules & process
  • Should you do it?
  • Impacts on credit
  • Paying off early
  • Compared to chapter 7 - pros/cons

Collection

  • How it happens
  • Your rights - FDCPA
  • Statute of Limitations - by state
  • What to do if you are harassed
  • Impact on credit
  • How they affect mortgage financing
  • Paying collections - do's and don'ts

Charge-Off & Profit/Loss

  • What it is
  • How it works
  • Impact on credit score and financing approval
  • Affect on mortgage financing
  • Paying charge offs - do's & don't

 

*For all consumers
*For members only
*Coming Soon

 

Judgment

  • What it is
  • How it happens
  • What to expect and do if you're served with a law suit
  • Impact on credit
  • Garnishments
  • Satisfaction - payoff recordings
  • Impact on real estate and mortgage financing

Tax Lien

  • What it is
  • How it affects financing
  • Impacts on credit
  • Satisfying/release - get & keep your proof

Child Support

  • What it is it?

 

*For all consumers
*For members only
*Coming Soon

 

Foreclosure

  • What it is
  • Impact on credit
  • Stopping foreclosure
  • Deficiency judgments
  • Sample letters

Repossession

  • What it is
  • How it works
  • Impact on credit
  • Deficiency judgments

 

*For all consumers
*For members only
*Coming Soon

 

Identity Theft Protection